Study applies market microstructure to Cuban informal currency market, finding market makers improve liquidity.
problem Understanding dynamics of informal currency markets.
method Modeling bid/ask intentions using Limit Order Book, applying Avellaneda-Stoikov model with Market Maker.
result Market Maker improves market quality and bid/ask dynamics.
Modeling informed trading with risk-averse market makers.
problem Understanding informed trading and its impact on market liquidity and risk premia.
method Connections between optimal transport theory and Kyle's model, including new characterizations of profits and duality.
result Liquidity is lower, assets exhibit short-term reversals, and risk premia depend on market maker inventories, which are mean reverting.
Paper models limit order book with informed traders and market makers.
problem Modeling the limit order book with heterogeneous market participants.
method Agent-based model with four types of participants: informed traders, noise traders, informed market makers, and noise market makers. Based on Glosten-Milgrom and Huang-Rosenbaum-Saliba approaches.
result Derived the static limit order book characteristics and compared them with existing models.
Study shows informed traders harm market makers but price discovery benefits outweigh costs.
problem Informed traders' impact on market makers' profitability.
method Agent-based model with heterogeneous learning agents, multi-agent reinforcement learning.
result Informed market order flow is harmful when aggregate informedness is low but beneficial as it increases.
Bitcoin option prices reflect both market maker supply and trader demand, especially from those with insider information.
problem Understanding how market prices of bitcoin options are influenced by both market makers and informed traders.
method Analysis of Deribit options tick-level data to identify supply and demand effects.
result At-the-money option prices are driven by volatility traders, while out-of-the-money options are influenced by both volatility traders and those with insider information.
This paper studies the equilibrium pricing of asset shares in the presence of dynamic private information. The market consists of a risk-neutral informed agent who observes the firm value, noise traders, and competitive market makers who set share prices using the total order flow as a noisy signal of the insider's inf…
This paper develops a new methodology for studying continuous-time Nash equilibrium in a financial market with asymmetrically informed agents. This approach allows us to lift the restriction of risk neutrality imposed on market makers by the current literature. It turns out that, when the market makers are risk averse,…
The continuous-time version of Kyle's (1985) model is studied, in which market makers are not fiduciaries. They have some market power which they utilize to set the price to their advantage, resulting in positive expected profits. This has several implications for the equilibrium, the most important being that by setti…
Financial market dynamics compared to thermodynamics.
problem Understanding the dynamics of financial markets through thermodynamic principles.
method Analogy with Szilárd information engine to derive market temperature and information extraction.
result Informed traders' gains are bounded by market temperature and information.
We study the price-setting problem of market makers under risk neutrality and perfect competition in continuous time. Thereby we follow the classic Glosten-Milgrom model that defines bid and ask prices as expectations of a true value of the asset given the market makers' partial information that includes the customers …
Unified approach solves Kyle model with dynamic information.
problem Solving a generalized Kyle model with dynamic information.
method Monge-Kantorovich duality and backward stochastic partial differential equations.
result Characterization of optimal strategies and pricing rules.
Modeling market dynamics with informed and uninformed traders and fads.
problem Optimizing market making in a market with fads, informed, and uninformed traders.
method Characterizing the optimal liquidity provision problem in a market with fads, informed, and uninformed traders, considering both complete and partial information.
result The price of liquidity is a function of the proportion of informed traders, and strategies ignoring fads underperform.
New formula identifies and quantifies costs for automated market makers.
problem Adverse selection costs faced by liquidity providers in automated market makers.
method Derives a Black-Scholes-like formula for AMMs and identifies loss-versus-rebalancing cost.
result Closed-form expressions for LVR applicable to all automated market makers.
We introduce a class of utility-based market makers that always accept orders at their risk-neutral prices. We derive necessary and sufficient conditions for such market makers to have bounded loss. We prove that hyperbolic absolute risk aversion utility market makers are equivalent to weighted pseudospherical scoring …
DFMM automates market making with adaptive pricing and risk management.
problem Challenges in decentralised automated market making (AMMs).
method Data aggregator, order routing, rebalancing, arbitrageurs, protective buffers, algorithmic accounting.
result DFMM optimises inventory risk and ensures market stability.
New automated market makers for multi-asset trading.
problem Liquidity management in multi-asset trading.
method Derived from self-financing transactions and rebalancing principles.
result Constant product market maker as a special case.
This research improves capital efficiency and impermanent loss in cryptocurrency markets using multi-token trading pools.
problem Poor impermanent loss and capital efficiency in automated market makers.
method Analysis and construction of a multi-token token proactive market maker (MPMM).
result MPMM shows better impermanent loss and capital efficiency than comparable market makers.
Study shows marketable order routing to wholesalers benefits all traders, leading to lower market depth and price volatility.
problem Determining the preference of retail traders for marketable order routing.
method Two models: one for market makers competing for retail order flow (Bertrand model) and another for price-taking competitive liquidity providers (open exchange model).
result Routing marketable orders to wholesalers is preferred by all traders, leading to mean reverting inventories and lower market depth.
Axiomatizes the bid-ask market maker's quoting rule
problem Axiomatizing the quoting rule of a market maker
method Eight natural axioms and six environmental assumptions
result A unique three-parameter family emerges
Study shows maker-taker fees improve market efficiency but increase costs.
problem Impact of maker-taker fees on total cost of taking orders.
method Agent-based simulation model for financial markets.
result Maker-taker fees increase total costs but improve market efficiency.
Study finds option volume imbalance predicts equity market returns.
problem Predicting equity market returns using option volume imbalance.
method Nonlinear analysis of option volumes decomposed into five market participant classes.
result Strong signals of predictability of excess market returns from Market-Maker volumes.
Traditional market makers are losing their importance as automated systems have largely assumed the role of liquidity provision in markets. We update the model of Glosten and Milgrom (1985) to analyze this new world: we add multiple securities and introduce an automated market maker who uses the relationships between s…
Proposes a framework to adjust quotes for informational risk in markets with informed traders and price-revealing quotes.
problem Informational risk in markets with informed traders and price-revealing quotes.
method Proposes a tractable framework to adjust quotes considering adverse selection and price reading.
result Market makers can adjust their quotes to better manage informational risk.
Modeling financial chaos with market makers' risk appetite.
problem Unpredictable price changes in financial markets.
method Using Hamiltonian approach with anharmonic oscillators and nonlinear coupling.
result Market makers' risk appetite determines chaotic dynamics in financial markets.
Study finds on-chain data can proxy off-chain cryptocurrency pricing.
problem Develop methods to proxy off-chain cryptocurrency pricing using on-chain data.
method Graphical models, mutual information, and ensemble machine learning.
result A significant amount of pricing information is contained in on-chain data, but precise prices are hard to recover except on short time scales.
Maker-taker fees can prevent algorithmic cooperation in market making, but not always.
problem Unexpected cooperation among independent algorithms in market making.
method Modeling market making as a repeated game, experimental analysis of transaction costs and rebates.
result Maker-taker fee models can destabilize cooperation, but not always with a specific relationship between costs and rebates.
New market makers improve on existing models in DeFi.
problem Improving liquidity and efficiency in decentralized finance.
method Developed a new family of market makers based on generalized means.
result G3Ms offer properties preferable to existing models.
Ensuring sufficient liquidity is one of the key challenges for designers of prediction markets. Various market making algorithms have been proposed in the literature and deployed in practice, but there has been little effort to evaluate their benefits and disadvantages in a systematic manner. We introduce a novel exper…
Market makers minimize regret by strategically setting bid and ask prices.
problem Minimizing regret in sequential market making decisions.
method Characterizes market making regret under various assumptions and distributions.
result Unveils a connection to first-price auctions and dynamic pricing.
Following the recent literature on make take fees policies, we consider an exchange wishing to set a suitable contract with several market makers in order to improve trading quality on its platform. To do so, we use a principal-agent approach, where the agents (the market makers) optimise their quotes in a Nash equilib…
This paper solves optimal market making for multiple goods, including bundling, under adverse selection.
problem Designing optimal market making mechanisms for multiple goods and adverse selection.
method Formulated as an optimal transport problem with geometric constraints, using differentiable economics.
result Optimal market making mechanisms can exploit bundling to improve prices and accept payments in kind.
Paper proposes efficient cost functions for automated market makers in DeFi.
problem Inefficient and computationally complex cost functions in DeFi.
method Proposes and analyzes constant circle/ellipse based cost functions.
result Proposed cost functions are computationally efficient and robust against attacks.
This paper analyzes and compares different Automated Market Maker mechanisms.
problem Impermanent loss in Constant Function Market Makers.
method Mean-Variance analysis of liquidity providers' profit and loss, comparison of different mechanisms.
result Optimized oracle-based mechanisms outperform Constant Function Market Makers.
Modeling market makers' quoting strategies to understand price impact.
problem Understanding how price impact arises from market makers' quoting strategies.
method Modeling market making as a dynamic auction using Stochastic Differential Games and finding Nash Equilibrium.
result The price impact function derived from market makers' strategies matches the Almgren-Chriss model.
The process of liquidity provision in financial markets can result in prolonged exposure to illiquid instruments for market makers. In this case, where a proprietary position is not desired, pro-actively targeting the right client who is likely to be interested can be an effective means to offset this position, rather …
This research compiles knowledge on decentralized exchanges with AMM protocols.
problem Improving and developing AMM-based decentralized exchanges.
method Established a general AMM framework, compared mechanics, discussed security and privacy.
result Illustrated conservation and slippage functions of AMM protocols.
New metric to measure liquidity position PNL, delta hedging algorithm for automated market makers.
problem Vulnerability of liquidity positions to price changes in underlying assets.
method Proposes a new metric for measuring PNL, delta hedging algorithm for various AMMs.
result New metric more accurately measures net value change due to price movement.
Model shows disclosure reduces trading costs in oligopolistic markets.
problem Reducing trading costs in oligopolistic markets with imperfect competition.
method Developed a multi-period Kyle-type model with mandatory disclosure and imperfect competition, proving existence and uniqueness of a linear equilibrium.
result Disclosure lowers trading costs by reducing price impact, and its marginal benefit is larger when competition is weak.
We analyze impermanent loss in AMMs and show G3Ms are simplest.
problem Understanding impermanent loss in automated market makers.
method Developed a general framework and analyzed Geometric Mean Market Makers (G3Ms).
result G3Ms have the simplest impermanent loss characteristics.
Starting from the Avellaneda-Stoikov framework, we consider a market maker who wants to optimally set bid/ask quotes over a finite time horizon, to maximize her expected utility. The intensities of the orders she receives depend not only on the spreads she quotes, but also on unobservable factors modelled by a hidden M…
Market maker handles negative prices with unique asset swapping.
problem Handling negative prices in financial markets.
method Unique market mechanism with numeraire currency, liquidity extensions.
result Liquidity fingerprint and payoff compared to established models.
The paper analyzes CFMMs to ensure accurate price reporting.
problem Ensuring accurate price reporting for CFMMs.
method Analyzes CFMMs under general assumptions to incentivize correct price reporting.
result Agents are incentivized to correctly report asset prices in a computationally efficient way.
Geometric Mean Market Makers super-hedge impermanent loss without models.
problem Super-hedging impermanent loss in Geometric Mean Market Makers.
method Model-free rebalancing strategy.
result Loss-versus-rebalancing vanishes due to finite variation exchange rate.
We consider the issue of a market maker acting at the same time in the lit and dark pools of an exchange. The exchange wishes to establish a suitable make-take fees policy to attract transactions on its venues. We first solve the stochastic control problem of the market maker without the intervention of the exchange. T…
This paper examines the uniform properties of AMMs in cryptocurrency markets.
problem Theoretical uniformity of AMMs despite diverse strategies.
method Derives a universal formula for liquidity provisioning and compares models.
result Constant function and token swap models are equivalent under uniform liquidity.
Investigates optimal strategies for market makers using internal liquidity.
problem Optimizing strategies for market makers with internal liquidity.
method Investigates optimal multi-objective strategy for market makers with internal liquidity.
result Draws important qualitative insights for real-world trading.
Study shows market makers can cooperate without communication.
problem Concerns of collusion in AI-driven market-making.
method Formulated as a repeated game, studied with Q-learning.
result Market makers can learn cooperative strategies without communication.
In most OTC markets, a small number of market makers provide liquidity to other market participants. More precisely, for a list of assets, they set prices at which they agree to buy and sell. Market makers face therefore an interesting optimization problem: they need to choose bid and ask prices for making money while …